Corporate debt restructuring is likely to cause "significant distress" among Indian banks like ICICI ( IBN , quote ) and HDFC ( HDB , quote ), according to a recent report from analysts at IDBI Capital.
Sonam Udasi of IDBI Capital reports that 345.6 billion rupees ($6.5 billion) were involved in corporate debt restructuring -- effectively defaults to some degree -- in the first half of FY12, the highest figure in eight years.
Of that amount, 56.7 billion rupees in debt were restructured in the first fiscal quarter of 2012, and 288.9 billion rupees in the second, a five-fold increase over the last three months.
The worrying aspect, Udasi says, is that restructuring may serve as a coincidental indicator for additional stress areas, suggesting a larger debt problem for Indian banks.
Corporate debt restructuring in India is a mechanism for restructuring large debts without the involvement of the country's Board of Industrial and Financial Reconstruction or the Debt Recovery Tribunal.
The borrower and lender agree not to seek legal recourse or outside intervention for 90 days while the debt is restructured.
According to Udasi, the rise in CDR referrals is spread across many banks, a "worrying trend" for smaller banks like Indian Bank, UCO, and Dena Bank.
Udasi takes a more positive outlook on larger banks like HDFC Bank -- traded in the United States as HDB -- Axis Bank and Bank of Baroda, which can better absorb the costs of restructuring.